From the four scenarios listed, which scenario do you believe adds the mostexpectedtotal profits with the least amount of operational risk over a 5-year period and why?

Scenario: "Product Launch"

You are the lead project manager for two product launches. Product "Redesign" is a redesigned product of your company's bestselling product.Product "New" is a completely new product in a new product category.

• The initial plan is toprice product "Redesign" at $425 per unitand product"New" at $600 per unit.
• Over the next 5 years the company couldsell anywhere from 235,000 to 550,000of product "Redesign"and125,000 to 425,000 of product "New".We believe that there is a 50% chance that demand will be at the low end and a 50% chance that demand could be at the high end.
• To achieve these projected sales numbers, for each product,the company will need to spend $8,000,000 dollars in marketing over 5 years, plus compensate the company's direct sales staff with a 5% sales commission on the purchase price of the product for each unit that is sold.
• For product"Redesign", we projecting that the companywill need to invest $30,000,000 for manufacturing equipment which will allow the company to make 500,000 units of this product over 5 years.
• For product "New", we projecting that the companywill need to invest $36,000,000 for manufacturing equipment which will give the company the capacity to make 350,000 units of this product over 5 years.
• As seen inExhibit A below, a thorough list of the raw material and labor cost needed to manufacture each product as well as the manufacturing overhead.
• The company will not have enough manufacturing capacity if demand for both products is on the high-end of the sales projections.
• We feel thatwith an additional investment of $10,000,000 million dollars for product "Redesign", operations can increase capacity to 750,000 units over 5 years, and for anadditional investment of $5,000,000 million dollars for product "New", operations can increase capacity to 475,000 units over 5 years.
• However, based on your initial breakeven analysis this additional investment will not pay for itself unless demand for both products significantly increases.
• The V.P. of marketing believes thatif the price of product "Redesign" is lowered to $370 per unit, forecasted sales will be anywhere from 375,000 to 800,000 units over 5 years,andif the price for product "New" is lowered to $550 per unit forecasted sales will be anywhere from 185,000 to 457,000 units over 5 years.

Your analysis will include looking at the expected operating profit and risk under four scenarios:

1. Scenario 1:Price product "Redesign" at $425 per unit and keep capacity at 500,000 units
2. Scenario 2:Lower the price of product "Redesign" to $370 per unit and expand capacity to 750,000 units.
3. Scenario 3:Price product "New" at $600 per units and keep capacity at 350,000 units
4. Scenario 4:Lower the price of product "New" to $550 per units and expand capacity to 475,000 units

Here are useful tips:

• Assume a 5-year time horizon in your analysis.
• To calculate expected profit, try calculating the total profit at both the low end and the high end of the demand curve under each scenario.Since, there is a 50% chance of reaching either the low end or the high end of the demand curve, you can then simply calculate an average total profit between the two data points that you just calculated to determine your expected profits.
• In your analysis of operational risk evaluate each scenario's breakeven points and compare this to the total amount of units that are projected to be sold under each scenario.Which scenario allows for a quicker payback.
• Also, when evaluating the trade-offs between increasing profits and incurring additional operational risk don't ignore the concept ofoperational leverage

Exhibit A: Operational Costs Product Product Redesign New Initial capital equipment 30,000,000 36,000,000 Incremental capital equipment to expand 10,000,000 5,000,000 Material cost per unit $ 148-75 $ 24000 Direct Product Labor cost per hour $ 2?.50 25.00 Direct Product Labor hours to make one 3 2 Management Salary Per Year $ 100,000 $ 100,000 Supervisor Salary.r Per Year $ ?5,000 $ ?5,000 Number of Managers 3 3 Number of Supervisors 10 10